Would you like to profit from your idea without having to start
your own company, worry about manufacturing or handle the expenses
of marketing your product? Consider licensing.

Licensing means the owner of intellectual property (a patent,
trademark, copyright or trade secret) gives someone else permission
to produce the product related to that property. In return, the
inventor is paid a royalty (typically 2 to 8 percent of sales). One
company I worked with signed a licensing agreement with the
inventor of a vibrating dental scaler. Over 10 years, the
inventor's 8 percent royalty amounted to more than $30 million.
Not bad for an investment of $15,000 for a patent and a rough
prototype.

Licensing can be ideal if you don't have the desire or
expertise to market your product. It lets you take advantage of the
marketing power of a large firm and enables you to concentrate on
creating more products instead of working on marketing or
operations.

On the downside, once you license a product, you have no control
over what the licensee does with it. The company may change the
product, fail to promote it or even drop it after a few years.
There's also the risk that, while investigating your idea, the
licensee may decide your patent is weak and design its own version
of the product.

Money Matters
While licensing does save you the expense of launching and
marketing your product, it still requires some capital. Typically
you need, at minimum, a patent, a prototype and research that shows
there is a market for your product. If you can't finance these
steps yourself, you'll need to seek an investor or partner.
Partnering with a product designer, prototype engineer or small
manufacturer can be a good way to share some of the financial
burden while getting help with the design and manufacturing
stages.

Virtually any type of product can be licensed. What varies is
the stage at which a company will license the product. You may be
able to strike an agreement quickly if you are already successfully
producing and selling the product. You may be able to license a
product with just a prototype if it meets a clear market need in a
convincing way. In some cases, you may even be able to license an
idea in the concept stage if the product has breakthrough potential
in a major market. The key word is "may." Licensing a
product in the concept stage is highly unlikely. The further along
your product is, the better your chances of licensing success. Try
to take your product as far as you can before approaching potential
licensees.

INSIDE SCOOP

To get a license,
you need to learn about your industry-inside and out. Learn who the
major players are in your market and which companies are most
likely to sign a licensing deal. Keep up with trade magazines and
attend trade shows and association meetings. You'll also need a
patent attorney with licensing expertise. Here are some helpful
resources:

Licensing Executives Society, a
network of licensing professionals, publishes a magazine and other
publications related to licensing; (703) 836-3106, www.usa-canada.les.org

What You Need

Prototype: A prototype is
almost always necessary. Companies use licensing to avoid going
through the costly development process themselves; they want you to
handle the prototype stage for them.

Research: To convince the
company your product will be successful, you need to present a
market research report including:

1. Customer
information

Number of customers

Key buying influences

How they buy

Where they buy

2. Competitive audit

Market share

Major strengths

Major weaknesses

Product opportunities

3. Industry opportunities and
threats

4. Key industry trends

Making
Contact
When approaching potential licensees, you need two types of
contacts. The first are people who will convince a potential
licensee that your product is ideal for the market. These include
key users, key retailers and key people in the distribution
channel. The second type of contact is someone who can
"push" your product inside the company you're
approaching for a license agreement. This could be a company
executive, a regional or national sales manager, a marketing person
or the R&D director.

Of the two, your most important contact is the person inside the
company. This person can help you fine-tune your proposal, tell you
who you have to convince, and offer insights into what you need to
do to get the deal done. To meet this kind of contact, you need to
get out and attend trade shows, industry events and association
meetings. Involve this person as early as possible so he or she can
guide you in developing your product in a way the company
you're approaching would like. Also, making inside contacts
doubles your chances of licensing a product. Without such a
contact, you may never successfully pass through the company's
invention submission policy to make a presentation.

Presentation
Power
First-time inventors often assume businesspeople want
nuts-and-bolts demonstrations focusing only on the facts. But they
are just as bored by a dry presentation as you would be. Put some
showmanship into your pitch to get them excited. You've worked
hard to get in the door, so don't be reluctant to spend a few
thousand dollars on creating a stellar presentation.

The Opening: Knock their
socks off by showing end users who are excited about your product.
Videotape testimonials, show people using the product, or use
before-and-after pictures that show how well the product
works.

The Details: Once
they're interested, move smoothly but quickly through the
details, including market research, your target customer, the
distribution channel, projected profitability and why your product
is a good fit with the company's product line.

The Proposal: Don't
make a formal offer. Instead, say something like: "I feel you
are the best company to promote my idea, and I'm open to any
type of partnership that works for you-from buying the product for
private-label sale to signing a license." If they don't
suggest a next step, offer to work with someone in the company to
propose next steps for evaluating your product.

GREAT EXPECTATIONS

Don't go into
licensing with blinders on. Here's what to expect when you
attempt to get a licensing agreement:

People may treat you like a crackpot
inventor unless you have a product and a
prototype.

You'll probably meet some
resistance from R&D departments.

Your first presentation will determine
whether you'll get the company interested in your product
idea.

The initial licensing agreement the
company offers will most likely be unfavorable.

You'll need an attorney to help
you negotiate a fair deal.

Once the deal is finally signed,
don't count on the licensing company to keep you well-informed
about your product's progress toward
introduction.

After the advance, you probably
won't see your first royalty check for 18 to 24
months.

The company may make substantial
changes to the product before introduction.

Most people will never know you are
the inventor of the product. The company certainly won't be the
first to tell anyone.

If your product is a success, you can
receive regular quarterly royalty payments for five to 10
years.

You'll need to keep active in the
market if you plan on presenting additional products for licensing
to industry companies.